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BG Second-Quarter Net Income Falls 21% on Writedown

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July 28 (Bloomberg) -- BG Group Plc, the U.K.’s third-largest oil and natural-gas company, reported a 21 percent drop in profit because of a writedown in the value of commodity contracts and an exploration charge.

Net income in the second quarter fell to $602 million from $761 million a year earlier, the Reading, England-based company said today in a statement. Although production volumes fell 2 percent to 57.3 million barrels of oil equivalent, or 630,000 barrels a day, due to maintenance, BG expects “slight” output growth for the full year.

BG booked a $443 million charge for its fuel hedging operations and “movements on certain long-term U.K. gas contracts,” the company said. That was in addition to an exploration charge of $366 million related to higher well write-off costs.

“The upstream results were disappointing versus our expectations,” said Oswald Clint, a London-based analyst at Sanford C. Bernstein & Co. “The LNG business played out with the company reporting their highest second quarter operating earnings ever, as more and more cargoes fulfill delivery contracts in oil-priced markets.”

Operating profit from liquefied natural gas rose 16 percent to $540 million on higher prices for the fuel.

Missed Forecasts

Excluding disposals and one-time items, profit increased 19 percent to $899 million. That missed the $996 million average estimate of 10 analysts in a Bloomberg survey. Earnings of $804 million were expected, according to BG’s average consensus of analysts, Paula Burton, a spokeswoman for the company, said earlier this month.

BG wrote off $255 million invested in the Mandarin well in Norway, of which about 78 percent will be refunded by the Norwegian authorities, Chief Executive Officer Frank Chapman said on a conference call with reporters.

The company plans to file plans for development and operations, or PDOs, for the Bream and Jordbaer discoveries to the Norwegian authorities, Chapman said.

BG fell 2.2 percent to 1,039.5 pence in London. The shares are down 7.4 percent this year.

China, the world’s biggest energy user, boosted LNG purchases in June by 58 percent from a year earlier on increased demand from power plants. Nevertheless, LNG production capacity increases forced countries, such as Qatar, to curtail supply amid a global glut. The U.S. became the world’s largest natural gas producer ahead of Russia last year after developing shale deposits.

Brazil, U.S.

BG is focusing on projects in Brazil, the U.S. and Australia and in May it agreed to join an exploration project in Tanzania. The company is examining plans for a possible expansion in Trinidad and Tobago, and the Caribbean nation plans to offer exploration licenses later this year, Chapman said.

The company in June won approval for an A$15 billion ($13.6 billion) LNG project in Australia from Queensland government on which it plans to make the final investment decision this year with production planned to start in 2014, according to the company presentation.

The Queensland Curtis LNG venture “is underpinned by long-term Asia-Pacific LNG sales contracts” of as much as 9.5 million metric tons a year with reserves and resources of around 2.9 billion barrels of oil equivalent, Chapman said.

“We expect aggregate sales of around 180 million tons of LNG an on a predominantly oil-indexed basis” from the Queensland project, he said. BG doesn’t plan to consolidate its development with other competing LNG projects in Australia, Chapman said.

BG joined Exco Resources Inc.’s acquisition of U.S. Haynesville and Bossier shale gas assets from Southwestern Energy Co. The company agreed in May to expand in the Appalachian basin a month after buying Common Resources LLC with Exco.

BG this month agreed to sell its interest in Premier Power Ltd. to AES Corp. and in April divested its 50 percent stake in Seabank Power Ltd. for about $320 million to Cheung Kong Infrastructure Holdings Ltd.

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net